Forgivable Seller Notes

February 24, 2026

by a searcher from Harvard University - Harvard Business School in Austin, TX, USA

Considering using forgivable seller note in a capital structure to mitigate risk/bridge valuation. Would love to hear from folks who have used - what timeline and metrics did you use for forgiveness triggers? what went well and what didnt?

1 Like

21 Replies

270 Views

Replies

Reply by a professional
from Pace University in New York, NY, USA

The language must be very clear regarding what specifically triggers the forgiveness of the debt. Ambiguity in this area can create significant risk. I know two buyers who had forgivable notes that ended up in litigation. The forgiveness of the debt was tied to revenue. In those cases, the seller alleged that the buyer made changes to the business that caused a decline in revenue, thereby triggering the debt forgiveness provision. They blamed the buyers for their actions and rejected the trigger for the forgiveness of the debt. You should ensure the purchase agreement and especially the forgiveness provision of the loan is drafted with clearly defined standards. DM if you want to discuss.

Reply by an investor
from Dartmouth College in 80 S Main St, Hanover, NH 03755, USA

Kinda like any other earn out, just the reverse outcome. I would think about it as “I’d be happy to hit this and owe the seller the note”. We used one - actually in a corporate carve out - that was not paid ultimately, that was based off hitting a max ttm revenue or gm threshold within 6 quarters after close, I think and I feel like it was graduated above a certain level and maxed out so was not binary threshold. The company did not make the minimum threshold so ultimately our purchase multiple remained conservative, loan forgiven. Ended up a good investment but was slow out of the gates.

+19 more replies.

Join the discussion